The House Judiciary Committee announced recently that it was opening an antitrust investigation into “tech giants” including Google. Chairman Jerry Nadler said:
[T]here is growing evidence that a handful of gatekeepers have come to capture control over key arteries of online commerce, content, and communications…Given the growing tide of concentration and consolidation across our economy, it is vital that we investigate the current state of competition in digital markets and the health of the antitrust laws.
We’re going to do a series of posts about some issues Chairman Nadler should consider in the Judiciary Committee’s review of Big Tech business practices. These posts will cover issues that relate both to Google as well as Facebook, Spotify and some others. Let’s start with reforming corporate governance and bring eyesight to the willfully blind.
1. One Share, One Vote, Not Ten Votes for the Special People: Anyone in the music business has had just about enough of government oversight from the consent decrees to rate setting to the Music Modernization Act, so I don’t recommend it as a solution in general. But–in the absence of marketplace transparency, the government is about the only place to go to bring reforms to well-heeled corporations. So rather than ask the government to fix specific problems on an ad hoc basis, the government would do well to ask what causes the market to fail as it clearly has with Google. Then rip out that problem root and branch.
The first question to ask when confronted with all of Google’s overreach is where was the board? That’s an easy question to answer in Google’s case–they were in the pockets of the insiders as you will see. But we ask that question because corporate boards of directors are supposed to be the first line of oversight to keep companies, especially publicly traded companies, from running off of the rails.
In Google’s case, the core problem is both easy to find and (I hope) easy to fix. It lies in the voting structure of the shareholders. Shareholder rights and corporate charters are state law matters and don’t relate to the federal government, but–the federal government does have a say about who gets to sell shares to the public. (For those reading along at home, I’m thinking of the Securities Act of 1933 and the Securities Exchange Act of 1934 under the jurisdiction of the Securities and Exchange Commission.)
The federal government also has an interest in protecting those who purchase the shares of publicly traded corporations. It is this nexus that gives the House Judiciary Committee clear oversight authority over the corporate structure of at least publicly traded corporations. Once a start up decides to feed from the trough of the public’s money, they should expect to answer to their public shareholders.
While anti-coup d’etat provisions might make sense for private companies whose investors are sophisticated financiers, or newspapers seeking to retain editorial independence, once that company is publicly traded a bald discrepancy that simply mandates voting power to the insiders forever seems like it has to go. And as we have seen with Google, the lack of corporate oversight has resulted in unbelievable arrogance and a complete failure of corporate responsibility. And worse yet, because Google got away with it, lots of other tech companies follow essentially the same model (including Facebook, Spotify and Linkedin).
Take stock buy backs for example, such as the $1 billion stock buy back announced by Spotify. It must also be said that stock buybacks approved by a board where insiders who benefit from the buyback have supervoting shares and control the board is a practice that reeks to high heaven. Buybacks and dual class supervoting shares have been widely criticized including by Securities and Exchange Commission Commissioner Robert Jackson who is also a critic of supervoting shares.
So how did Google come to give control to its insiders, essentially forever? Google’s supervoting structure started when Google was a private company as a way for the founders to preserve control and avoid venture capital investors pushing them around.
OK, fine, I understand that. But once Google went public with their IPO that made those same insiders billionaires several times over, why should the insiders keep that level of control?
You may ask how that supervoting stock works?
Google (which is really its parent company, Alphabet) trades under two ticker symbols on the NASDAQ: GOOGL Class A and GOOG Class C.
Oops. What happened to Class B? Ay, there’s the rub.
Class B shares are not publicly traded and are held by insiders only. But as you will see, they control every aspect of the company. So how do Google’s insiders get this share structure? There’s actually a simple answer. Class A shares (GOOGL) get one vote per share, Class B shares get 10 votes per share and Class C shares (GOOG) get no votes.
That’s right–Class B shares cannot be purchased and their holders get 10 times the voting power of the Class A holders, often called “supervoting” shares, because their super power is…well…voting. (When sold, Class B shares convert to Class A shares.)
The Class C shares were created as part of a 1:1 stock split that doubled the number of shares, halfed the price per share, but resulted in no change of the voting power of the Class A and C shareholders. Class A holders got double the shares but half the voting power post-split.
When the dust settled, the Google/Alphabet voting capitalization table looked something like this:
Class A: 298 million shares and 298 million votes, or roughly 40% of the voting power with votes counting 1:1.
Class B: 47 million shares and 470 million votes, or roughly 60% of the voting power with votes counting 10:1.
What this also means is that the holders of Class B shares voting as a bloc will never–and I mean never–be outvoted at a shareholder meeting, their board of directors will never be challenged much less replaced and shareholder meetings are a one way communication event where the insiders tell the stockholders how the insiders will spend their money.
Who controls the Class B shares? I culled out some numbers for individual holders which may not be entirely accurate, but the individual holders are who you would expect. These numbers shift around a bit depending on whose sold what (if you want to drill down, you can check the SEC’s Form 4 filings, such as this one for Sergey Brin). These are the people that Commissioner Jackson might call the “corporate royalty“:
Larry Page: 20 million shares (as of 2017)
Sergey Brin: 35,300 Class B shares plus 35,300 Class A shares (as of 2018)
Eric Schmidt: 1.19 million Class B shares, 40,934 Class A shares, and 10,983 Class A Google shares, plus 2.91 million Class B shares through family trusts.
Sundar Pichai: 6,317 Class A shares and no Class B shares.
The House Judiciary Committee has a chance to correct the supervoting system as bad policy and implement a long-term fix across the board for all dual-class companies that want to trade on the public exchanges.
This means that the “corporate royalty” at Google, Facebook and Spotify would be much more accountable to shareholders which would help keep the company on the rails. I think that the Judiciary Committee might find that they are pushing on an open door at the SEC, especially with Commissioner Jackson.
The essential proposal is a simple tradeoff–if you want to keep supervoting stock, sell your shares privately to sophisticated investors under a registration exemption and don’t sell shares to the general public. But if you want to sell shares to the public, keep your corporate governance at least arguably transparent and fair by sticking to one share one vote.
[A version of this post first appeared in Chris Castle’s MusicTech.Solutions blog]
The Trichordist 